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BOK warns that increased government spending could increase inflationary pressure

by news dir

The Bank of Korea warned that rising government spending could stimulate inflation. It is pointed out that the government, which is focusing on price stabilization, including lowering the fuel tax, has again increased inflationary pressure.

On the 27th, the Bureau of Investigation of the BOK published a report titled ‘Inspection of major inflation drivers in Korea and the United States’. The BOK cited the government’s expansionary fiscal policy as one of the reasons why consumer prices exceeded the BOK’s stabilization target (2%) for six consecutive months from April to September this year. The report evaluated, “There is a possibility that liquidity, which has increased due to the expansionary fiscal policy to respond to the COVID-19 crisis, will act as an inflationary pressure.”

A similar analysis is found in the Monetary and Credit Policy Report prepared by the US Central Bank (Fed) in July and the new book, Population vs. Goodhart et al. said, “If liquidity, which has been increased by the government fiscal policy, is not recovered in a timely manner in the course of responding to the crisis, it will act as inflationary pressure due to pent-up consumption during the economic recovery process.” The BOK also observed that increased liquidity from prolonged accommodative monetary policy would be a factor pushing up inflation.

It is analyzed that the fact that households have ample extra money has also contributed to increasing inflationary pressures. Last year, the household net savings rate (the proportion of savings accounted for in disposable income, etc.) was 11.9%, the highest in 21 years since 1999 (13.2%). This is the result of curbing spending last year due to COVID-19. Inflationary pressure is growing as the government has provided disaster aid to households with plenty of spare money and measures to stimulate consumption have been introduced.

As expectations spread that the quarantine system will switch to ‘with Corona’ (step-by-step recovery of daily life), consumer sentiment is also stretching. The Consumer Confidence Index (CCSI) for October was 106.8, up 3 points from the previous month. It has risen for the second month in a row since last September. When this index is higher than 100, it means that consumer sentiment is optimistic compared to the long-term average (2003-2020).

By Kim Ik-hwan, staff reporter [email protected]

ⓒ Hankyung.com, unauthorized reprinting and redistribution prohibited

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